Thank you, everybody, for, for joining us. I'm here with Natera CFO, Mike Brophy, Head of Oncology, Solomon Moshkevich, right? Did I get that right?
President, Clinical Diagnostics.
Clinical and Diagnostic. Sorry about that. Great! So, so, you know, I think the biggest surprise of Q3 was probably the cash burn. How did you remove so many expenses, and why, why do you feel like nothing will impact, you know, growth on a go-forward basis from those the big cuts in expenses?
Yeah, you know, it really didn't. The cash burn reduction really did not come from some dramatic reduction in operating expenses. It was really in our mind the kind of often articulated strategy of ours, kind of coming to fruition and starting to show some results, which was build a world-class lab and commercial infrastructure and data behind best-in-class tests. Hold the, you know, the infrastructure, the commercial sales footprint constant, and then get leverage on that commercial footprint and continue to drive really rapid revenue growth while holding operating expenses really stable. So operating expenses were really stable. You know, sequentially, again, in the quarter, revenues grew very rapidly. We're up kind of 33% year-over-year in Q3.
Gross margins were quite strong, so we were at 45% gross margins in Q3, which, you know... And we went through some detail on that in on the earnings call, talking about how we really felt like in Q3, that was a fairly repeatable gross margin performance. There was not a lot of, like, one-time benefits or things like that. Like, all those seemed like a you know, organic performance, which on an organic basis, showed continued good traction, sequentially versus Q1 and Q2. So that's, that's the formula, right? You've got best-in-class products, you've got rapid growth on the- on revenues, you've got improving gross margins and stable operating expenses. That's how you, that's how you drive, you know, reductions in cash burn.
I think coming out of that, coming out of the quarter, as we mentioned, we feel more confident than ever that the goal that we'd set for ourselves a couple of years ago was to get the overall business to cash flow breakeven. Feel more confident than ever that, you know, that we can hit that goal next year and get to a quarter where we're kind of at, we're at cash flow breakeven.
Yeah. So why are you so confident in the cash flow breakeven targets on, you know, as we move the next couple of few quarters? What, what's coming off the P&L? Because, I mean, I think you still are burning, you know, double-digit millions.
Yeah
...even though the last time. So there has to be things coming off the P&L, we should—you maybe want to tar-
It's less about things coming off the P&L, David. It's more about revenue coming onto the P&L and just continued gross margin improvements. So we feel like we've got a great kind of volume and revenue runway ahead of us in all three of our primary businesses. We've got meaningful cost of goods sold reduction projects that are underway, that are scheduled to launch both this year and next year. And again, you know, with that backdrop, you know, if you're holding operating expenses to be kind of more modest growth, kind of mid-single-digit growth, you know, that's what can drive you to, that's what- that's going to get you from, you know, $38 million down to down to zero in a quarter.
Gotcha.
Yep.
All right, can you maybe give us a flavor on a maybe ballpark or conceptually thinking about Signatera test versus an upfront Signatera test, you know, the exome versus a recurrence test, i.e., the PCR follow-up. You know, and kind of where are you at in terms of maturity? Because, you know, as the business matures, I mean, I assume you're going to see a lot more PCR tests-
Yeah
... as a percentage of the overall tests. I mean, where are you at in maturity? And, you know, I don't need a perfect number here-
Yeah
... just, you know, ways to think about it.
We're still very early stages of that. I mean, I think kind of, you know, at a mature, steady state, I think you could expect that, you know, a high percentage, 80%, 85% + of the volume would come from patients in a recurrence monitoring setting. If you think about kind of the waterfall of patients, your new patient starts, and then they stay with us for a number of years. And we're seeing we've got really launched in late 2019, early 2020, and it's now kind of end of 2023, and we've got, you know, very high compliance of patients who started with an exome in 2020 are getting recurrence monitoring testing with us today.
So having said that, just where we are in the launch, there's still a meaningful component of the patients are in that either they're getting the exome this year, or they're still kind of in their six-month adjuvant treatment window because the volumes are growing so rapidly. So early days, and so that's a, that's a driver that I think, you know, can, can really help us going forward.
Gotcha. How are you sizing the TAM and MRD? I mean, I don't think you've put out, like, a major slide and where do you think the market will be in 10 years? I'm talking about actual market size versus just the TAM.
Yeah.
Do you want to start off?
Yeah. Yeah, we, we put out numbers a few years ago, and we were just getting into the market, and we think MRD is probably something like 15 million-20 million tests a year opportunity. And, you know, just a simple way, you know, you can break that down a few different ways, but if you think about, about 2 million new cancer diagnoses per year in the U.S. alone, most of those, by far, are early-stage disease. And if you consider that, you know, let's say in our lead indication, colorectal cancer patients-
... we expect to get 10-14 tests over their first five years. If you figure, you know, they're testing consistently with Signatera years one, two, three, four, five . So, you know, you can pretty quickly get up to those kind of numbers. Where are we going to be in terms you know, 10 years from now? I mean, you know, we all have our own crystal balls. I think with the significant phase III randomized data sets that are going to be reading out over the next three to five years, I mean, in some cases, in colorectal cancer, we're going to see, you know, in less than 12 months, mid-next year, we're going to see the first readout in a phase III randomized data set with the ALTAIR trial.
But ten years from now, I mean, I think that's going to be maybe 40%-50% penetrated. I mean, you see some diagnostics that are standard of care in guidelines today that are still not being adopted in more than 50%-60% of patients. So there is some kind of ceiling on it, but I think we're going to see a pretty big transformation.
Oh, sorry. Off topic on... So it's interesting you say that, 'cause I mean, would you say that your test is maybe adopted ahead of guidelines, like, in a higher penetration rate than you would see normally?
Well, I think that's been the experience, right?
Yeah.
That's just been the data, you know, three years in the launch now. In the last quarter, we had a little more than a third of oncologists in the United States ordering the test. And so I think that kind of speaks to the huge unmet need and the pretty clear clinical utility that physicians are seeing for Signatera right now.
You got it. You sounded really positive on ACOG switching to the women's health or NIPT business. What's kind of giving you confidence in ACOG this particular time?
Well, I mean, first is just the data that we, we've put forward for 22q. We starting in 2014, we ran what became a, you know, a six-year, 20,000-patient, prospective, real-world clinical trial-
Mm-hmm.
that, for the first time, kind of prospectively defined the incidence of 22q in the population and definitively showed, you know, our excellent, performance, of our assay, right? And, and that study was designed specifically to answer the, kind of the important kind of clinical questions that practitioners had at the time around, around screening for 22q. And we feel like the, the, you know, the, the study was an important contribution, to the field. That's now been published. There's been, you know, there's been sufficient time for that data to be kind of socialized and understood and, and, and, and discussed. And, you know, our understanding is that, you know, the, you know, the relevant professional societies have, you know, had their meetings.
They've done kind of guideline committee meetings, and are now in a position to update guidelines. I would just caution you, though, that, you know, that's not something that we have a crystal ball around. It's not something that we would guide to or plan to. We would presume that as something that, you know, would be upside to our business if we got it. Maybe one early case study there was the update of the ACMG guidelines late last year. December of last year, there was a very strong guideline in favor of 22q screening.
Mm-hmm.
You know, that was published from ACMG, and we await updates from ACOG at this point. There's another guideline that would, I think, have a significant impact on us and for patient care, and that's related to broad panel carrier screening.
Mm.
That's been a topic that I think is quite important to physicians in the field. And again, the feedback that we've heard is, you know, that, you know, there's a lot of support for, you know, an updated guideline in that area as well.
Just getting into that one, what would that look like? Because, I... Expanded carrier screening is already kind of in guidelines.
Yeah.
So, I mean, what mechanically has to change to make the insurance companies like realize, "Hey, this is actually in guidelines?
Well, I think that, I mean, largely, yeah, I think we're actually seeing that happen. So I mean, if you, for those of you that follow us closely, I mean, I think we've been pleasantly surprised by the, you know, the coverage we've seen, this year, after some reversals last year that caused several players that were focused on broad panel carrier screening to actually go out of business, and patients to actually lose access to the technology. And so I think there's language to kind of clarify the importance of the technology for practitioners that makes it more clear that there, you know, should be broad coverage for the test.
And just on this, I mean, if you get into guidelines, I mean, obviously there's going to be an ASP benefit because, you know, you get more of these, more of this coverage. Would there actually, could there actually be a volume benefit from guidelines, or is that just kind of physicians already like it and know it?
Yeah, I mean, I think... Look, I think there's already been broad adoption of carrier screening, you know, in the space. I mean, just for reference, for, you know, every 100 NIPTs that we run in our lab, we, you know, we, we see about 55 carrier screening tests. They often come together, at, at, you know, at the same time, in a patient's journey. That's up significantly from where it was even a couple of years ago, when I would quote that statistic, I would say for every 100 NIPTs, there's only about 40 carrier screening tests. So certainly, you know, mind share of carrier screening continues to expand, and I think, I, you know, I think expanded guidelines could have an impact, you know, to continue to expand that, you know, the use of that technology.
Got it. Well, can you highlight the chronic kidney disease, your new announcement in chronic kidney disease? How should we think about the Natera opportunity? Can you help us size in terms of patients and potential reimbursement and what's your data showing?
... Yeah. Yeah, that's a really exciting new opportunity. Big clinical unmet need that Natera uncovered really in commercializing its Prospera rejection test. And we met a lot of nephrologists and transplant nephrologists and discovered a pretty significant unmet need in renal genetics. So there's, estimated to be about 37 million adults, or actually I should say, adults and kids, in the country who suffer from chronic kidney disease. And there are, a lot of genetic causes for kidney disease, but very few patients get genetic testing today. And probably about 1 million new diagnoses of CKD per year.
So, you know, if you think about the testing opportunity, it's gonna be somewhere between that, you know, it's more than a million, if you figure you're gonna have the opportunity to test and improve outcomes for patients who've been diagnosed over multiple year timeframe. And, you know, the opportunity is really significant because, for the most part, up until now, most physicians have not had access to a lab who's been able to provide quick, you know, quality service with genetic counseling, and with high-quality performing tests. So, you know, it's folks are pretty excited in the nephrology community. I think it's gonna be a big step for us in terms of inflection points.
You know, we just put out really great study data from the RenaCARE study, demonstrating the utility of the test, not only in patients who had no known diagnosis, but also in a lot of patients who the existing diagnosis was either wrong or was nonspecific, or needed to be refined further in order to impact treatment decisions. So really expanded the utility and the scope of who might benefit from the test. But, you know, we also expect the guidelines committees to implement changes to the guidelines in the future to enshrine how important renal genetics is as part of the diagnostic workup for a new CKD patient.
Gotcha. How long have you been working on this chronic kidney disease area? And just—I'm just thinking about, like, is this... Would this be a new avenue where you weren't thinking about it a couple of years ago, or even, like, six months ago, so it would be outside of the long-range plan? And, Mike, I know you like to give a lot of people, investors and analysts crap because, you know, like, a lot of people didn't spot minimal residual disease. And you're like: "You're talking about this thing. No one wanted to hear it. Tell us more about NIPT." Is chronic kidney disease that?
Well, I think the concept and our awareness of the scope of the unmet need, I think, probably started out of our conversations with nephrologists as we talked to them about Prospera. You know, and as very similar to the way that we evolved in carrier screening in talking to patients and physicians in the women's health setting, this seemed to fit very cleanly within the offering that, you know, that we provide to patients that are getting Prospera, particularly when they're getting treated by the nephrologist. So it... I think that is a very clear kind of case study, and we've done this time and again.
It fits in nicely with our strategy, where we innovate a market-leading test that solves an important unmet need that's based on our core technology, and in this case, it's Prospera. And then that product launch gives us insight and access to a set of patients where we can solve other needs for them, often at the same time or, you know, a similar set of patients for the same physician. So this is just right out of kind of the standard playbook of trying to solve unmet needs and solve problems for the physicians. You know, it's potentially a... Solomon kind of talked you through some of the numbers. It's quite a large patient population. I think we just got to see.
You know, I think we've got to. We published this data, which we thought was incredibly encouraging, and we've just gotta quietly monitor it. I mean, part of the way that you continue to deliver, you know, deliver kind of high growth year in and year out, is that you have to do these kind of things. You've got to produce the data, you've got to solve a problem, and then you've got to be patient, and have the uptake happen in the background. It's a little bit different from Signatera, in that sense, in that it doesn't require some, you know, truly enormous upfront investment in a commercial and lab infrastructure in order to serve it.
Yeah, clinical development.
Yeah.
Yeah, as well.
All right. You know, I mean, I'm not saying, you know, break, fix something that's not broken with Signatera. I mean, it's been probably the fastest product I've ever seen to hundreds of millions of dollars in revenue and diagnostic. I mean, I can't think of anything close. I mean, Guardant360 was always really fast. I mean, that's the closest thing I can think of. But what could we look forward to in terms of product enhancements here, or product differentiation or different products to add to it? I mean, could we be thinking about a tumor-naive version? Can you talk about maybe more upfront genome versus exome, more marker versions? I mean, what do we look forward to?
I think on all those things, you know, our approach has always been to just offer a menu of solutions for the physician and for the patient, and not be locked into any one technology or like one use case. There will be scenarios, I think, where, you know, some of the products you mentioned, you know, they fill, even if it's a smaller niche, they still fill a niche nonetheless for our physicians and patients. So we wanna be in a position to kind of be agnostic as to, you know, which product the physician and the patient wanna go with. So I think, you know, all those things are on the roadmap and would be potential, you know, additional launches for us.
Gotcha. Can you talk about reproductive health? You know, I think pricing is stabilized here. You know, a lot, because of the pricing issue, you've seen a lot of exits from the market and, you know, companies go out of business. You know, is that a good step in terms of, you know, no, we don't want these companies to go out of business, but is that, is that a potential where, you know, you could actually see ASP lifts from here, even in the absence of ACOG, because you've seen these exiting companies, and maybe there's less price competition and maybe more, you know, pretty clear to the players, like, you're gonna have less product if you don't have?
There's certainly been a very meaningful market shakeout in the women's health space over time. And, as you mentioned, there's been a number of competitive exits, and I think, you know, we've been able to, you know, win a large share, you know, of that, of that kind of the market that's opened up as a result of those exits. I think, you know, when I unpack kind of the trends on ASPs and women's health business in Q3, I mean, I have to admit, I felt quite encouraged about what I saw. I think that we're in a position where women's health ASPs can be stable and actually potentially improving next year, leaving aside any positive impact from guideline inclusion.
So, yeah, I'm actually feeling quite encouraged about that business.
Good. And then how should we think about the gross margins long term? And do you think you're now on a permanent upswing, where, you know, this could be kinda linearly up? And how fast can that upswing go?
Yeah, you know, the reason why we give annual guidance is that, you know, I fully expect there to be variability quarter to quarter. So just taking 2023 as a case study, if you ask me what the kind of the organic gross margins were in Q1 through Q3, I'd say 41%, 42.5%, 45%, but the printed gross margins were 39%, 45%, 45%, right? And that's just because there are some one-time factors that will affect gross margins quarter to quarter. But if you're able to kind of look, you know, zoom out over the course of a year, you'll find us, you know, our guide kind of has us at that 43%-45% metric, which is more stable.
I do think that at the distance of one year, I do think that we have all the ingredients in place to have meaningful uplift next year. And maybe you and I will be sitting here next year, and it'll be kind of 100 basis points sequentially every quarter, or maybe it'll be lumpy, but I think at the end of the year, you know, we can be significantly higher than we were this year, and that's kind of commensurate with this goal of getting to cash flow breakeven.
Yeah.
In terms of the, you know, mature gross margins in the business, I mean, it's an interesting question. We, we actually, when we set out this goal a couple of years ago to get to cash flow breakeven, we actually kind of laid out a, kind of a longer range, model for this business. And, you know, and, and we, we thought that the, you know, the mature gross margins of this business could be 70% or better, and I absolutely still believe that. I mean, I, I, I probably have more...
I was confident at the time, obviously, because it went on the slide, but I think we've hit all the marks between over the last two years for us to feel, you know, we've gotten obviously closer to that number, and also we're just closer in terms of the clinical trial, you know, data development and reimbursement milestones we need to hit to get there.
Well, let's actually talk about the other parts and as you grow the expenses. So we're thinking about R&D and sales and marketing. What percentage is dedicated to Signatera? How are you balancing the cash management with the need to really solidify the competitive advantage here with data, particularly when we're talking about outcomes kind of studies-
Yeah
... that are really important in terms of generating competitive advantage?
Yeah, look, the North Star remains, do the work on the, on generating data, particularly, you know, the interventional prospective outcomes data that changes, clinical practice and, and helps you to, to meet the unmet needs, that, that patients, need it for. I mean, that's, that's the goal. You know, if you think about, the, you know, operating expenses and investment in clinical trial expenses, there's an outsized investment still in Signatera because we're, we're relatively early, in the, you know, in the development, of that, of that product and that use case, right? So that's gonna continue to be a focus. We're not going to make some kind of short-term decision to not fund or not, you know, not participate in a, you know, in a, in a clinical trial that can change, can change, clinical practice.
We're gonna absolutely be committed to doing that. We can do that in the context of relatively stable operating expenses from here, and growing revenues. So I think that we can actually. We're at a scale now where we can have both, so long as, again, the expenses are relatively stable.
Gotcha. And I guess only have time for one more real fast one. This probably isn't even a fast question, but, you know, is there any competitive offering in MRD that you deem maybe stronger than others? Do you think maybe it's tumor-independent, given the not lack of tissue, or do you think maybe other kinds of ancillary products, maybe it's bundled with an Oncotype or, or-
Yeah
... something like that? Is there any?
Yeah, we've been relatively surprised by the kind of the lack of data generation and the lack of, you know, products on the market or really any volume traction for many competitors over the last three years. I mean, just looking historically, that's just a fact of the matter. Looking forward, this is a huge unmet need. It's enormous opportunity to serve these patients. And, you know, so we feel and there's lots of great companies that are running as hard as they can. So there will be competition in the future, and frankly, we welcome that. I mean, that's why we're putting the time and effort in now on evidence development, excellent commercial operations, and excellent laboratory operations.
Thank you very much and for coming.
Yeah.
Thank you, everybody.
Thanks.